Greece’s fragile primary budget surplus is not much of a bargaining chip

One reason cited [1] for why Syriza will be able to talk tough with the Troika, presuming it wins today, and can form a government, is that it has a healthy [circa 5%] primary budget surplus.  That’s the difference between revenues and spending, once we ignore the cost of servicing debt.  The hypothesised threat is that the new Greek government renounces the debt and has no more need to borrow from capital markets, taking more in taxes than it spends.

However, this is not the whole story.

Cut adrift from the Troika, the Greek government does not have the funds to stand behind its own banks.  They would be left insolvent by a Greek default [economically, they are already, really].  A run on Greek banks, either prompted by default or the threat of it, could not be stemmed by a credible guarantee of deposits.

The primary surplus would fast disappear as the contraction in money, credit and economic activity played out.

It’s these events that would precipitate the Greeks ejecting themselves from the euro – there being no legal mechanism currently for the EZ to do that itself – as they scramble to print Drachmas to pay their ongoing liabilities like pensions, government salaries, and social security.

And the prospect of self-ejection, done messily and slowly, since the Greeks have none of the requisite infrastructure to pull it off, will reinforce the likelihood of a bank run and capital flight, even if, as JP Koning rightly suggests, the Drachmasation may ultimately fail.

Quite apart from this, are two factors.

First, there’s the matter of new and unfunded government expenditure in the Syriza manifesto.  Who knows what would eventuate in the coalition-formation process, but they are not currently affordable [ie they would bust the primary surplus on their own].

Second, as the FT reports, tax collection is plummeting right now as Greeks forecast that unpopular property and other taxes will be ended, and perhaps also that there will be less appetite to collect on legacy obligations that the new political leaders discredited.  Ironically, this drop in tax collection reduces Syriza’s ability to deliver on the promised goodies which will win them the election.

It’s interesting that as the election has approached, there has been no precipitous rise in other spreads that might signal that markets were worried about contagion from events surrounding Greece.  That could indicate blind faith that a Syriza-led government and the Eurozone would see sense and find a sensible deal [which, to be clear, for me would involve drastic debt forgiveness in exchange for…].  But it could also indicate that they have judged a disorderly workout of the problem as largely a problem for Greece and no-one else.  If the latter were the case, this too limits Syriza’s leverage at the bargaining table.

[1] See, for exmple, Simon Wren Lewis.

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